Most people are familiar with the «stock exchange» concept through popular films and books, but not many of them fully understand what it really is. This article from Hitecher aspires to bridge this knowledge gap, and we will start with the history of stock exchanges.
SAILING TO BELGIUM!
The history of financial exchanges began in a small Belgian town of Bruges, where a merchant named Van der Beurze ran his business. The business was very successful, and after some time Bruges became one of the largest trade centers in Belgium and all of Europe attracting local producers and foreign guests. Van der Beurze worked very hard to turn his town into an enjoyable place and did everything he could to create a favorable business environment there. In particular, he allocated a room to store securities, set up a meeting room, and gave a separate building for clerks to work in.
The enterprising merchant’s hotel become a symbol of the city, a kind of center of gravity for finance. And although it was not an exchange officially, it performed the functions of an exchange. As we can see, trading (in a certain sense) existed as early as in the 16th century.
The first official exchange, however, was established in the Belgian city of Antwerp, which was considered to be a competitor of Bruges. The main building of the exchange with its legendary sign saying «For Traders of All Nations and Languages» in Latin was completed in 1531. It was used to sell and buy securities issued by the governments of various countries and cities. But the exchange’s services extended beyond that — one could buy almost any goods delivered to the city by sea.
As you know, transportation by sea was very risky at the time. If the sea were merciful, a vessel carrying the goods would successfully reach its destination point, and if not, it sank on the way. Therefore, the whims of Poseidon had a direct effect on product prices. It led to an active development of speculations in Antwerp: trying to predict the weather, traders in those days relied on the opinions of fortune tellers and astrologers. However, it did not last very long, as a major economic crisis broke down in 1550, and a little later the city was destroyed.
HEADING FOR AMSTERDAM!
The Amsterdam Stock Exchange was founded in 1612, and it is the oldest stock exchange still operating. It turned 206 this year, although, in fact, it is older than that. It should be remembered that it was the main building that was completed in 1612, but trading sessions were held before that: on the bridge or in the neighbouring church, if the weather was bad.
The Amsterdam Exchange is the world’s first exchange to begin trading in securities. The first company to offer its shares through the exchange to the public was East India Company founded in 1602. It was followed by West India Company (founded in 1621), whose securities were made available for purchase not only by residents of the Netherlands, but by any person, regardless of his country of origin.
THE TULIP MANIA OR THE FIRST RECORDED SPECULATIVE BUBBLE
Unfortunately, the happiness was short-lived, and the Amsterdam Stock Exchange was not spared a crisis either. It sounds amazing, but the key factor in that story were common tulips. Flowers have always enjoyed special admiration, and since time immemorial, they have been used to decorate royal chambers and grand receptions. In the past centuries, when it was much more difficult to grow flowers, they were valued much higher.
Therefore, it is not surprising that when tulip bulbs started trading on the stock exchange, they gained wide popularity. Seeing that their prices were increasingly growing (or the bullish trade, as they would say today), merchants and other enterprising individuals wasted no time to buy them driving the prices even higher. It came to the point where one tulip bulb could buy you an estate. For greater clarity, let us illustrate it with a few figures: average annual income of a Dutchman was 150 guilders back then, and the price of some tulip varieties reached as much as several thousand guilders!
This first exchange bubble burst in 1637, when the flower market was oversaturated, and there was nobody to sell them to. A great number of people were head over heels in debt and could not afford any purchases, and people who had money lost interest in the product. As a result, the bubble burst, dealing a horrendous blow to the welfare of the population and the country’s economy.
With the industrialization process and development of capitalism exchanges emerged in many countries. Depending on the instruments traded, they are divided into the following categories:
- stock exchanges (shares, bonds, etc.);
- futures exchanges or derivative markets (futures, options);
- currency exchanges;
- commodity exchanges;
- cryptocurrency exchanges.
However, many exchanges operating today are universal. In other words, they combine several sections trading in various instruments.
The largest market today is NYSE Euronext having the capitalization level of almost $ 30 trillion. It was formed in 2007 after the merger of the New York and European stock exchanges. It trades in shares and other securities issued by numerous multinational giants and traders and investors from all over the world flock there to buy them.
Nowadays, almost every country has at least one stock exchange, where foreign currencies, shares and other financial instruments of leading national companies can be bought. In Russia, it is the Moscow Exchange, in Great Britain, it is the London Exchange, etcetera.